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Jun Yan

Why growth is bad for your bank balance

By Business Advice No Comments

Growth is good. But it comes with big challenges.

With the hype in the startup world, growth, in the form of a mythical hockey stick, has become one of the much vaunted and sought after business metrics.

As we frequently see reported globally, the highest growth and highest valued technology startups are rarely profit or cash flow positive – think Uber and WeWork.

What that means for the majority of business owners, is that balancing growth with cash flow or capital needs is one of the key operational challenges.

It’s probably what you’ll lose sleep over (if this is you, take a breath and fill out our growth early warning signs check list ).

Put as a simple equation:

Time + Money = Growth

It’s not always that easy to distill, but the concept means either taking your time to grow organically at a rate matching your business structure, or you’ll need to pay to fast-track that growth. The problem is that many businesses experiencing fast growth don’t have a solid understanding of their model, or potentially that the growth is not always good. We encounter this daily. We met with Founder M who was thrilled with the fast pace of growth of their company but after looking at their bank balance, they had a gut feel something wasn’t quite right.

The metrics looked great and business was booming – the user base was rapidly scaling, while sales and revenue were growing quickly. Then we took a look at the real figures. What we found was that although the company was growing rapidly, for every dollar it made in sales, it was losing 20 cents. That’s not a long-term business model that anyone wants to be in charge of.

A deeper discussion with the Founder M also brought forward the stress they were under and challenges with operational cash flow. We were able to develop a historical financial model of the business which in turn allowed us to forecast the impact of this continued growth. Discovering that the fast-paced growth was actually hurting cash flow with a serious impact on working capital, enabled this founder to make some quick changes that have changed the way the business operates.

In this case it was some simple changes in how invoicing was being managed which gave the business a clear view to prioritise improvement of their processes and systems around invoicing.

Here are some of the common concerns we see every week in high growth companies:

Capacity constraints

Capacity issues are when you start struggling to meet deadlines or fulfil your service agreements.

How to manage this:
Good record keeping is essential to know that your time taken to meet your targets or deadlines is creeping up. It likely will mean that your gross margins are starting to decline. If you know it’s a problem you can identify the solution which could mean raising prices, or hiring staff or a combination of the two.

Cash flow issues

High growth doesn’t always mean cash in the bank. In fact, in most cases it’s the opposite and cash flow issues are one of the most common struggles in all kinds of business. This area in particular is where the term “creative accounting” starts to come into its own where business owners try to find cash flow where they can, and that will inevitably lead to problems.

How to manage this:
Knowing and understanding your business fundamentals and cash flow is essential. One solution is to build a three-way financial model to see the impacts of decisions on your bank balance.

Too busy for admin

If you’re too busy working on the business to run it, you’re about to hit some problems. We commonly see business owners who are in trouble due to missing payroll, not paying superannuation properly or even missing their quarterly tax payments.

How to manage this:
Ensure you have the right support in place to keep your admin responsibilities on track. Depending on the size and scale of your business, this might mean looking at hiring staff, upskilling or an external option such as a virtual CFO or consultant.

Feeling stressed

Often overlooked in business is how you’re feeling. Growth can easily equate to high stress, lost sleep and decline in your overall well-being. But being stressed and busy isn’t always an indicator your business is doing well. As we saw in the case study at the start of this article, understanding how you are servicing the growth is essential to ensure it is meeting your business goals.

How to manage this:
Use stress and busyness as early warning signs to take a break and ensure you are across all your company fundamentals to ensure you’re growing in the right direction. If you’re wondering whether your growth is about to create challenges for you, we’ve created this checklist.

Take a moment to think about how these affect you:

Growth early warning sign checklist

❏    It’s taking you longer to deliver projects or meet deadlines

❏    Your day to day costs are growing (check your accounting software)

❏    You don’t know how much cash is in the bank week to week (cash position)

❏    You’ve started losing track of admin (is your payroll getting done)

❏    You’re unsure if you’re paying all your bills on time

❏    You are on ATO Payment Plan

❏    You’re worried about running out of capital

❏    Losing sleep/feeling stressed

If you’ve checked more than two boxes, and need help, feel free to reach-out to our team for help: info@ravitinsights.com.au

Don’t listen to billionaires — they don’t understand your business

By Business Advice No Comments

When we started Ravit Insights, we followed advice from billionaires and industry experts by putting ourselves in front of potential clients and this is what it got us: radio silence. The truth is, billionaires and experts don’t have a full understanding of our company, and they don’t have a full view of yours either — despite what they would have you believe on LinkedIn and Instagram.

They got to their high level of success over a long period of time, and they’ve probably forgotten half of what they’ve done to get there.

The mistake we made was taking their words at face value rather than thinking for ourselves. Following their advice, we priced our solution too high, and we didn’t go anywhere. Instead, we needed to educate ourselves and find people who truly understood what we were trying to achieve and at what scale and pace.

We could have had a lot more clients if we had ignored the experts and trusted our gut straight away. This is the advice we wished we had been given two years ago.

1. Beware advice without context

Experts love to give their advice, and it can be valuable, but any business owner needs to understand it is often given without context or a full appreciation of the intricacies of your company. Listen to your gut. You have experience and skills that have brought you to where you are — that instinct is everything you’ve learnt in action.

2. Listen to your clients

Pricing is so important for a new business. We believed we needed to prove ourselves first to be competitive in the market, rather than price high straight away. Other businesses might have different needs and struggles. Looking back, we would recommend you do your research and know and understand your competition, but what ultimately worked for us was getting in front of people and listening to them — especially when they weren’t saying anything.  You know what works or not, so by facing a client or a customer, you can get a gut feeling if it’s right or wrong.

3. Educate yourself

When people start a business, they often see an unmet need for which they have found a solution. Others are also driven by passion and an underlying mission. The finances flow on from that, but business owners often don’t have the level of financial literacy to understand fundamentals, such as how their business finances work or what the cashflow is like month-to-month. That’s why it’s important to get help. You don’t need to know how to make a financial model, but you can understand what happens to your finances when you grow and hire staff or if you need to raise funds.

This post was first featured on Smart Company.

Contact us today at info@ravitinsights.com.au